Control Transactions
Control Transactions
This chapter considers legal strategies for addressing problems arising in control transactions (i.e., between a third party (the acquirer) and the company’s shareholders), and specifically corporate takeovers. The most obvious agency problem is between the target board and the target’s minority shareholders, the central issue being whether the bidder can make an offer to the target shareholders without the incumbent management’s consent. Solutions range from allocating this decision exclusively to the shareholders (the “board neutrality rule”), to designating it as a joint decision for incumbent management and shareholders (this follows from the possibility of adopting “poison pills” in U.S. corporate law). Additionally, target shareholders face high coordination costs in deciding how to respond. The most prominent solution to this problem is the European “mandatory bid rule,” which (in certain circumstances) requires extending an offer to all outstanding shareholders at a specific price. This rule has an obvious chilling effect, and a number of jurisdictions have accordingly weakened its strictness. Takeover regulation is a field where legal solutions differ significantly and most saliently between the two main takeover markets, the U.S. and the UK. However, it is suggested that in practice the two systems are closer than may appear at first sight.
Keywords: control transaction, takeover, board neutrality rule, poison pill, mandatory bid rule
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